Yahoo Finance Thomson Reuters Is a Pass
- By Mark Yu
Thomson Reuters (TRI) reported its third-quarter and nine-month fiscal 2016 results on Nov. 1, 2016. The $32.2 billion news and information company reported a -1% change in its revenue to $8.3 billion and no change in its operating profits to $1.1 billion, compared to the same nine-month period in 2015.
In review of its recent operations, Thomson Reuters managed to sell one of its divisions, Intellectual Property and Science Business (IPSB), for $3.55 billion. IPSB contributed 8%, or $976 million, in total Thomson Reuters sales in fiscal 2015. As observed, Thomson Reuters also recorded $126 million profit in discontinued operations in the period (1).
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The intrinsic value of TRI
Thomson Reuters on selling its IPSB business in mid-2016:
"This divestiture marks an important step in sharpening our focus on the intersection of global commerce and regulation. We expect to use the proceeds from the transaction to buy back shares and the balance to pay down debt and reinvest in the business." - Jim Smith, president and CEO of Thomson Reuters
Thomson Reuters on latest quarter performance:
"Our core subscription businesses are moving in the right direction, our cost controls are working, and we are increasingly confident in our execution capability. That is why we are going to pick up the pace of our transformation efforts." - Jim Smith
Shares of Thomson Reuters rose 4.16% on Nov. 1 while the broader Standard & Poor's 500 index closed down 0.68%.
Outlook
(Press Release)
Market performance
Thomson Reuters had five-year and year 2016 total returns of 13.57% and 19.3% compared to the S&P 500 index's 14.7% and 12% (1).
Valuations
According to GuruFocus data, Thomson Reuters had a trailing 12-month price-earnings (P/E) ratio of 27 times (industry median 20), price-book (P/B) ratio of 3 times (industry median 2.2) and price-sales (P/S) ratio of 3 times (industry median 1.28). The news and information company also had a trailing dividend yield of 3.11% with an 81% payout ratio and 2.6% share buyback ratio.
(40-F)
Thomson Reuters
Thomson Reuters was formed after Thomson Corp.'s acquisition of Reuters Group in 2008 for more than $16 billion. In review, the newly merged company had $12.5 billion in 2008 and $12.2 billion in fiscal 2015.
As of March 2016, 59.6% of Thomson Reuters shares were owned by the Woodbridge Co., a holding company for the Thomson Family. According to company filings, David Thomson is the chairman of Thomson Reuters, Woodbridge and the Globe and Mail Inc.
Thomson Reuters is the world's leading source of news and information for professional markets (2). The company stated that it has operated in more than 100 countries for more than 100 years.
Thomson Reuters had three business segments: Financial & Risk, Legal and Tax & Accounting.
Financial & Risk
Thomson Reuters described the segment as a leading provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. Financial & Risk also provides leading regulatory and operational risk management solutions.
In 2015, the segment lost 6% to $6.15 billion while comprising 50.4% of total Thomson Reuters sales in fiscal 2015. The segment also delivered an operating margin of 18% in that period.
In its third-quarter fiscal 2016 comparison year on year, the Financial & Risk segment grew by 1% while delivering an operating margin of 20.6% compared to 17.9% in the prior-year period.
Legal
The segment is a leading provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world.
In 2015, the segment lost -0.7% to $3.35 billion while comprising 27.5% of total Thomson Reuters sales. The segment also delivered an operating margin of 29.4% in that period--highest margin among Thomson Reuters' segments.
In its third-quarter fiscal 2016, the segment grew flat while delivering an operating margin of 31.6% compared to 31.8% in the prior-year period.
Tax & Accounting
The segment is a leading provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government.
In 2015, the segment was the only one that grew its sales with 3.4% change to $1.4 billion while comprising 11.6% of total Thomson Reuters sales. The segment also delivered an operating margin of 24.2% in that period.
In its third-quarter fiscal 2016, the legal segment grew by 6% while delivering an operating margin of 18.3% compared to 16.3% in the prior-year period.
Intellectual Property & Science
This segment was sold by Thomson Reuters for $3.55 billion to private equity firms Onex Corp. (ONEX.TO) and Baring Private Equity Asia in July 2016.
In review, IPSB provides comprehensive solutions that enable the life cycle of innovation for governments, academia, publishers, corporations and law firms to discover, protect and commercialize new ideas and brands.
In 2015, the segment lost 0.6% in its sales compared to the prior year and contributed 8.2%, or $1 billion, in total Thomson Reuters sales. This would indicate that Thomson Reuters was able to sell the business at least at 3.5 times P/S multiple. IPSB also delivered an operating margin of 22%.
Overall, Thomson Reuters had five-year sales, profit and operating margin figures of -1.35%, 6.66% and 12.2% (1).
Cash, debt and book value
In its recent nine month operations, Thomson Reuters had $2.39 billion in cash and $26.9 billion in debt with a 0.76 debt-equity ratio, compared to 0.64 year on year (1). The company also had 78% of its $86 billion assets in goodwill and intangibles while having a book value of $35.5 billion compared to $40 billion year on year.
Cash flow
As per its cash flow from operations, Thomson Reuters reported an increase of 6% to $1.99 billion in its nine months fiscal 2016 operations compared to year-on-year figures. Cash flow from operations included discontinued operations such as the sold IPSB business.
Capital expenditures for the period were $659 million, leaving Thomson Reuters with $1.3 billion compared to $1.09 billion year on year (1). The company allocated 149%, or $1.97 billion, of its free cash flow in dividends and share buybacks. Thomson Reuters allocated 137% of its free cash flow in dividends and share buybacks in the past three years.
Conclusion
As observed, Thomson Reuters is seeking to narrow down its business and wants more focus. Now that the IPSB segment, which delivered about 22% to 24% operating margin in recent years, is gone, Thomson Reuters needs to gain back the profit loss on that segment in particular although IPSB contributed the least -12.7% or $221 million - operating profits in fiscal 2015.
Top-line growth also remained stagnant since its merger in 2008 while recording profit growth brought by good practice in margin expansion among its segments.
Thomson Reuters also carries with it a good amount of goodwill and intangibles in its assets, which would deter conservative investors as well.
Despite these findings, Thomson Reuters should be able to withstand ongoing flat sales growth and company restructuring brought by its good amount of insider ownership.
(Google Finance)
Meanwhile, I would say Thomson Reuters is a pass.
Notes
(1) Morningstar data.
(2) Information here moving onward came from Thomson Reuters 20-F, unless specified.
Disclosure: I do not have shares in any of the companies mentioned.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 6 Warning Sign with TRI. Click here to check it out.
The intrinsic value of TRI
